Anthony Hilton: Regulation is now a Pushmepullyou

There was an interesting moment last week which highlighted the ability of regulators to look both ways at once.

On the positive side, the Financial Conduct Authority announced it was joining Swiss and Hong Kong authorities investigating possible manipulation of part of the foreign exchange market. This underlined the post-financial crash willingness of regulators in different jurisdictions to work together.

But on the same day it emerged that there was dissent on the board of the Commodity Futures Trading Commission in Chicago — one of the world’s most powerful regulators. Although a majority supported a plan to co-operate with others in extracting a penalty from JPMorgan in settlement of a case arising out of the London Whale rogue-trading fiasco, one of their number — Scott O’Malia — felt the CFTC should not accept a deal cooked up by other regulators but conduct its own investigation. He said that by joining a settlement broked by other regulators, “the commission might be missing the opportunity to pursue allegations of greater wrongdoing — price manipulation”.

Thus in one example we have a signal that regulators want to co-operate and in the other, a reminder of how far they are prepared to go down this route and that — just below the surface — regulators tend to be as competitive as everyone else.

This adds greatly to the challenges facing the financial sector, many of whose firms deal with more than one regulator. How can a business please its regulators when they want different things?

Obviously this is likely to be most acute in regulation across borders where regulatory philosophies reflect different cultural and legal systems. Tensions exist in spite of the aforementioned co-operation on such things as Libor and foreign exchange, with the Americans generally impatient with what they see as a flexible UK system, and having no time at all for the rest of the EU. But thus far these difficulties have been manageable.

More challenging in the longer term, however, is the way regulators across Asia are emerging who are determined to flex their muscles and who after the financial crisis here are in no mood either to respect the Western system of regulation nor to be guided by it. Before 2007 they were prepared to accept that the West knew what it was doing financially and had a superior system.

Now they no longer believe that. This is not simply an issue for the big markets such as China and Japan. There are cases unfolding at the moment in South Korea and Thailand which have the potential to be uncomfortable for the firms involved. No doubt before too long regulators in India and Indonesia will show a similar independence of approach.

However, in the near term it tends to be the rivalry between two lots of domestic regulators who are supposed to be on the same side which irritates firms more, coupled with the gaps between what a regulator said last year and what they say now.

This problem is particularly acute in the US. One of the shocks of the past few weeks was news that JPMorgan had set aside in excess of $20 billion (£12 billion) to meet the costs of future legal actions. Some stems from the firm’s own activities but a significant amount of it is a consequence of its buying Bear Stearns and Washington Mutual — two companies brought down by the financial crisis. The point is that the authorities pressed JPMorgan to rescue these firms and it did so on the understanding it would not be penalised by regulators for anything these businesses might have done in the past. However, that understanding has not stood the test of time. The same goes for Lloyds shareholders over here —most of the billions the bank is paying out in PPI compensation is a consequence of its acquisition of HBOS.

There is another issue over here. It is a matter of some bemusement to the industry to hear Financial Conduct Authority personnel — who for the most part are the same people who, six months ago, were in similar jobs in its predecessor organisation the Financial Services Authority — saying that what was acceptable to them last year is not acceptable now. One might understand this in areas of banking which have been at the heart of the financial crisis but it does not play well elsewhere in the securities industry, fund management and insurance, where they remain unconvinced that their industry needs fundamental regulatory change.

The fact that the new regime is much more judgemental adds to the tension. When regulators say it is not just enough to be compliant but that a firm needs to have a culture which will deliver the best possible outcomes for the customer, and it is the responsibility of top management to deliver this, then they might as well sit by the directors in the boardroom with a big rubber stamp marked “veto”.

But the bigger problem is different regulators wanting different things and that is not just a problem for the CFTC on the other side of the Atlantic. It is already happening here as the FCA and Prudential Regulation Authority begin to assert themselves.

The chief executive of one well-known insurance company told me a few weeks ago that he became so frustrated by conflicting requests from the FCA and the PRA that he asked them in a joint meeting whose guidance he should follow as their requirements were conflicting.